Florida lawyer warns of deepening foreclosure mess

ROYAL PALM BEACH, Florida (Reuters) - A Florida lawyer at the forefront of legal challenges against foreclosure practices by mortgage lenders says the U.S. housing morass will drag on due to difficulty in determining who owns home loans.

Questions over practices in foreclosure procedures across the United States have forced at least three banks to temporarily halt their proceedings and prompted a growing chorus of calls by lawmakers and regulators for an industry-wide moratorium until problems are resolved.

However, Tom Ice, whose law firm Ice Legal P.A. was among the first to get banking executives to acknowledge shoddy foreclosure practices, said it will be difficult for banks to fix all of the paperwork errors.

“This isn’t just a procedural technicality, it’s exposed the very problem at the heart of the securitization fiasco, which is no one knows who owns what,” he said in an interview on Tuesday.

A record 1.2 million U.S. homes are expected to be taken over by banks this year, up from 1 million last year and 100,000 in 2005, real estate data company RealtyTrac Inc. says.

Faced with a rising tide of foreclosures, lenders employed so-called “robo-signers” — middle-ranking banking executives who signed thousands of affidavits a month claiming they were knowledgeable of the cases.

However, some lenders, prodded by legal challenges, now say officials were not aware of details in all of the cases and vow to resubmit them. It is unclear how many cases are involved but it is believed to be in the tens of thousands.

But Ice said a broader problem was damaging the process of resolving the foreclosures. He said many banks were initiating proceedings without knowing if they in fact own the loans and often failed to produce requested documents.

The securitization of home loans meant many have been sold off to other investors. Banks still own some, but frequently serve as loan servicers on behalf of the actual owner, whether it is another bank or an investor pool.

Some mortgages can be tracked in an electronic system known as MERS, or the Mortgage Electronic Registration Systems, that traces transfers among member banks. But the mechanism is not fully reliable, Ice said.

A recent sample among some 400 foreclosure cases Ice’s law firm is handling revealed 71 percent with possible discrepancies in detailing the owners of clients’ loans.

“Few of these processes followed the rules, shortcuts were used at every step,” he said. “The industry itself doesn’t know who owns what.”

BANKS WARY OF BAD LOAN STIGMA

Some banks may be reluctant to step forward, worried about how it might reflect the amount of bad loans on their balance sheets, Ice added.

Lenders, including JPMorgan Chase and Co., Bank of America Corp and Ally Financial Inc, are now scrambling to defend and improve their foreclosure procedures.

At least six states are investigating the foreclosure procedures at Ally, JPMorgan Chase, or both.

Ice said without a verifiable way to identify the loan’s owner, it may leave cases open to more claims by homeowners’ lawyers of faulty foreclosure procedures since some lenders will not be able to justify they indeed own a home loan.

A letter from California congressmen released on Tuesday said thousands of people in their districts have reported that despite efforts to seek loan modifications or other relief many financial institutions “routinely fail to respond in a timely manner, misplace requested documents and send mixed signals” about what is required to avoid foreclosures.

Ice’s base is in Florida’s Palm Beach County, home to one of the nation’s largest concentrations of foreclosure cases.

He said most of his clients were looking for ways to renegotiate mortgages after falling on hard economic times.

“My clients want to have someone who owns the note to come to the table to rework the terms of the loan,” he said.

“But the reason we lawyers are having problems getting the decision-maker to come to the table is because they are not telling the truth as to who the owner of the loan is.”

If lenders are unable or unwilling to identify the loan holders, then homeowners should be allowed to use bankruptcy to reduce their mortgage payments, he said.

In May, the U.S. Senate voted down a bill presented by Democrats that would have given bankruptcy judges greater flexibility to modify mortgages. The proposed legislation was fiercely opposed by the banking industry.

“It would be a fair solution because it gets homeowners something they can afford, it gives the banks the value they’re going to get anyway and it can skip around this whole problem of who the owner is,” Ice said.